Sign up to receive our monthly newsletter!

The 4 Main Factors Affecting Home Prices

Jul 9, 2018
by
Brian Arnesen

Across the United States, housing prices have surpassed their peak reached just before the 2008 financial crisis. Many people take those numbers at face value and shout “Bubble!” However, there are a number of factors explaining why the current market is far from a bubble, and why there is plenty of room for it to grow.

1. Inflation & Appreciation

Yes, current housing prices rival those of 2008. However, what many people fail to realize is that adjusted for ten years’ worth of inflation and average appreciation, prices are nearly nowhere as outlandish as they were in 2007-2008. A $300,000 property, experiencing 3% annual growth for ten years, would be worth over $400,000 in today’s market. The fact that a property could have been worth $300,000 ten years ago, and is once again worth $300,000 today, is far from a bubble.

2. Lack of Qualified Workers

For years, the United States has suffered from a shortage of blue-collar workers in some key trades such as construction work. In a 2016 survey, “68% of builders reported that they had to raise home prices due to labor shortages.” According to the Bureau of Labor Statistics, the number of vacant construction jobs peaked in July 2017 at a whopping 255,000 — the highest since the recession.

3. Strained Supply

Supply & demand is one of the most basic principles of global economics. As supply dwindles, competition for what scraps remain becomes fierce. The US has had 35 straight months of declines in the number of homes for sale. Limited supply means homes are selling at record speeds often above asking price.

One of the largest factors affecting supply is the lack of new housing developments. “Fewer homes are being built per U.S. household than at nearly any time in history,” according to the Federal Reserve Bank of Kansas City. Another factor is local residents often oppose any new construction in their area. This is commonly referred to as the “Not in My Back Yard” phenomenon. While the reasoning for opposing new construction can differ from person to person, the effect on home prices is undeniable.

Lack of supply coupled with millennials (90 million of them) reaching home-buying age, and the increase in property investors (both corporate and private) who are snatching up every property they can, means that the market is suddenly extremely competitive. Buyers across the country are sacrificing home size and quality just so they can afford to get into the game.

4. Increased Building Costs

Currently, lumber makes up one-third of the cost of building a new home. Over the past few years, lumber costs have continued to surge. One of the main drivers of the increased cost of lumber is the series of disputes between the United States and Canada which has impacted the lumber trade between the two countries. One of the most recent causes of tension is a dispute of tariffs that have been imposed on Canadian lumber imports.

As of June 2018, “lumber futures have risen to nearly $600 per 1,000 feet of board length, up drastically from $250 in 2008” (Bloomberg). Increasing lumber costs means an increasing home building price, which leads to an increased selling price.

Looking Ahead

So where do prices go from here? First and foremost, it’s important to recognize that every housing market is different. What holds true for Orange County, California, might not hold true for Orange County, Florida.

With rising prices, many people fear the “pop” of the bubble. Keep in mind, that the 2008 “pop” was the result of countless unscrupulous loans, in which borrowers not only misrepresented how much they were making but were lured toward adjustable rate loans. These adjustable rate loans gave incredibly tempting teaser rates (very low interest-rates) that expired. As teaser rates expired, borrower’s payments shot up and delinquencies skyrocketed.

In today’s market, the rise in prices is a much steadier event. Most of the root causes of today’s record-high home prices will eventually ease. If the construction labor market keeps improving and new entry-level homes begin to appear with gusto, we may see an easing of values. Until that happens, home prices will only continue to increase for the next few years, barring some yet unforeseen event that might cause another burst.